As of August 12, 2011, the SEC has expanded its ability to reward individuals who provide the SEC with original information that leads to successful enforcement actions arising from securities law violations. Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd- Frank”), Section 21F was added to the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Section 21F of the Exchange Act and the rules prescribed thereunder require the SEC to pay awards to whistleblowers—those individuals who voluntarily provide original information to the SEC relating to securities law violations leading to the successful enforcement of a judicial, administrative or related action involving sanctions exceeding $1 million.1 Awards will be paid out of the statutorily created Investor Protection Fund, which currently has a balance in excess of $450 million. The newly created Offi ce of the Whistleblower at the SEC will evaluate and manage the claims for awards.2
Original Information; Voluntarily Provided
A whistleblower must voluntarily submit the information to the SEC before a request or demand for reward is made from the federal government, state attorney general or securities regulator, the Public Company Accounting Oversight Board (the “PCAOB”), or any self-regulatory organization. In order for a whistleblower submission to be considered original information, it must be:
- derived from the whistleblower’s independent knowledge;
- not already known to the SEC; and
- not exclusively derived from an allegation made in a judicial or administrative hearing, in a government report, hearing, audit, or investigation, or from the news media.
Subject to certain exceptions, there is some information that will not be eligible for consideration for the purposes of this program, including information that is:
- subject to the attorney-client privilege;
- obtained through legal representation;
- uncovered in connection with an entity’s processes for identifying and reporting possible violations of law, in which case the whistleblower is an offi cer or director of such entity;
- associated with the performance of an independent audit, internal audit or investigation; or
- obtained in a manner that is determined by a U.S. court to violate applicable federal or state criminal law.
Under the new rules, a whistleblower is eligible to receive an award only if monetary sanctions totaling more than $1 million are awarded as a result of enforcement actions, such as a judicial or administrative proceeding brought by the SEC, the Attorney General of the United States, an appropriate regulatory authority, a self-regulatory organization or a state attorney general. The SEC has the discretion to determine the amount of the award paid to the whistleblower, and the amount will be at least 10 percent, but no more than 30 percent, of the monetary sanctions that the SEC or other authorities are able to collect.
Among other things, a whistleblower’s participation in internal compliance systems is a factor that may increase the amount of the award. However, the culpability of the whistleblower, an unreasonable reporting delay or interference with a company’s internal compliance and reporting systems are factors that may decrease the amount of the whistleblower’s award.
A person will not be considered for a whistleblower award if he or she is an employee, offi cer or member of the SEC, the Department of Justice, another regulatory agency, a self-regulatory organization, the PCAOB or any law enforcement organization; if he or she is a member of any foreign government; if he or she has been convicted of a criminal violation related to the SEC action; or if making the submission violates requirements of Section 10A of the Exchange Act in connection with an audit of a company’s fi nancial statements.
Section 21F of the Exchange Act also includes a provision that prohibits any employer from retaliating against the whistleblower. For the purposes of this antiretaliation provision, a whistleblower includes a person who reasonably believes that the information he or she is providing relates to a possible securities law violation whether or not the conditions, requirements or procedures are satisfi ed to qualify for any award.
Proactive Measures Critical in Response to New Rules
Now that the new rules are in effect, companies are more likely to be subject to whistleblower complaints in light of the potential monetary awards. Companies should take this opportunity to be proactive, assess their current compliance programs and incorporate the whistleblower rules into such programs. Companies should educate employees about the bounty program and remind employees that a whistleblower’s participation in internal compliance systems is a factor that may increase the amount of the award. Whistleblowers may still be able to receive an award even if they report to the company before going to the SEC. A company should consider augmenting current employee training programs to include providing training to managers on avoiding retaliation. Employees should be further educated on their confi dentiality obligations and the risks of false reporting. In advance, companies should determine what role their internal audit departments and audit committees will have in response to whistleblower complaints.